The dictionary description for the word venture is a risky or daring journey or undertaking and that provides a big clue as to what venture capital is all about.
Any form of speculation that involves money always has to carry an element of risk but the whole idea behind the use of venture capital as a form of investment is that you are committing to a calculation form of speculation where the prospect of making a decent profit makes the risk worthwhile.
Venture capital is frequently used as a form of raising investment capital for businesses who are starting out or want to expand on an idea that they have had that should deliver a decent return.
Here are some of the fundamentals of venture capital that you need to know.
There is always an end date insight
One of the first things to understand is that venture capital is not a long term arrangement, instead, a deal is normally struck with a specific end date in mind or certain financial targets that trigger a payment to the investor.
A venture capitalist might offer to invest a specific sum of money over a 5-year term, for example, and will expect a pre-agreed return on their cash that includes a profit designed to compensate them for the risk taken.
The risk is that the business may not succeed and the capital could be lost in that scenario.
Filling a void
Despite the fact that banks are primarily in the business of lending money they do tend to be fairly risk-averse especially in tough economic conditions or when the business applicant doesn’t have a track record or assets to cover the bank’s potential losses.
Venture capital helps to fill the void that exists when banks won’t lend. Provided the business proposition offers a sufficient return and an acceptable level of risk that is a good opportunity to seek out venture capital.
The right time
The majority of venture capital deals tend to be struck at a period when the business is beyond the startup stage and is more at an adolescent stage, so to speak.
Being in the right industry also helps, as venture capitalists show a tendency to invest in specific areas of industry that are perceived to be on an upward curve, such as technology, for instance.
Being in the right line of business and choosing the right time in the life cycle of the company can often be critical to getting a venture capital deal agreed.
Venture capital will invariably involve agreeing to give up equity in the business with the venture capitalist taking a preferred-equity ownership position.
A typical venture capital deal would see an investor expecting to make as much as ten times their original capital over a period of about five years.
These returns might seem high but they are designed to reflect the risk involved and also make allowances for the fact that some propositions fail and the capital investment is lost or diluted.
Venture capital is a popular funding option for entrepreneurs and wealthy investors alike, and it fills a space where banks sometimes fear to tread because of their lending rules.